LIC-IDBI Bank: A Stop-Gap Solution

It has been reported that the Life Insurance Corporation of India would pick up stake in IDBI Bank Ltd. through a subscription to fresh equity to be issued by the bank. The bank is currently valued at Rs 24,000 crore and has the highest percentage of non-performing assets among government-owned banks.

It appears that the government has recognised that the existing approach towards re-capitalisation would not be adequate for this bank and that it needs additional support.

Before looking at whether this step is the most appropriate one, it is important to look at the government’s policy towards the stress in the banking sector.

The Reserve Bank of India’s directives for active recognition of NPAs and true disclosure revealed that a very large proportion of debt was stressed and further that it was concentrated in about fifty large accounts. This immediately led to suspicions about the quality of lending and risk assessment, which then branched off into finding out who was responsible, their culpability, and the punishments to be awarded. In the interregnum, attempts at resolution through the lenders’ forums and asset reconstruction entities did not make much progress as the lenders’ consortiums were unwilling to take the responsibility of agreeing to discounts on the amounts owed to them.

It is now for the National Company Law Tribunal to adjudicate, through a transparent auction process, the disposal of these stressed assets.

After the Code has been in operation, there have been several resolutions, most of which have entailed very large discounts to the loan books of the lenders. While the bankers feel relieved that the decisions are not theirs and they cannot be found fault with, the balance sheets get more and more stressed, as recoveries become a smaller and smaller proportion of the amounts due. If the earlier system of debt resolution mechanisms had been allowed to function without the fear of post-action scrutiny, audit, and vigilance, it would definitely have brought about a much better settlement of debts.

Again, the government’s intentions on resolution have not been clear. It has been unwilling to step into the resolution processes, while at the same time allowing investigations into causes and culpability to be pursued. As a result, there is confusion about whether the focus is recovery or to fix responsibility. With the NCLT, it appears that the government has lost sight of the urgency of recovery, and in all likelihood, these same assets will resurface under different names and find themselves eligible for fresh debt, after having swallowed the earlier debt.

And some officials and some promoters will find themselves in the dock.

It is interesting to look at how China is tackling the same problem. There is a major move on to de-stress banks and to deleverage them, and the Chinese government has taken several steps to recapitalise the banks.

• First, there is a focus on recapitalisation through equity and perpetual bond issues that could be convertible into equity at a later date.
• Second, there is a relaxation of statutory liquidity and cash reserve norms, to enable greater flexibility in lending.
• Third, there is stronger regulation and oversight over shadow banking and lending to certain sectors
• Finally, some banks have been allowed to fail, and there have been defaults on bond redemption by the banks, thus spreading the pain among the customers as well.

Here, we do not have any fresh guidelines that would prevent re-occurrence. Consortium lending, inadequate appraisals, overvaluation of assets and plain frauds has happened, and there has not been any major regulatory overhaul on the process and assessment of lending.

After all, the country closed down the Unit Trust of India, unitholders were protected, and the government benefited too. It should be possible to look at solutions different from the ones that come out of the existing regulatory box.

The IDBI Bank decision is, thus, just a measure to avoid taking hard decisions about the future of the bank. The LIC funds will prop up the balance sheet for some time, but unless there is a change in process and in decision making as well as well as regulatory oversight, there is no guarantee that similar problems will not occur further down the road, for the same bank.

S Narayan was Finance Secretary, Government of India.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.